China's rate-cut likely to hurt banks, curb new loans to small borrowers

SHANGHAI, Nov 22 (Reuters) - China's latest interest rate
cut is set to dent the profitability of domestic lenders,
especially mid-sized banks, which are already suffering from
higher bad loans and a slowdown in profit growth.

The central bank unexpectedly cut rates late on Friday,
stepping up efforts to support small and medium-sized
enterprises (SMEs) which are struggling to repay loans and
access credit, as the economy slides to its slowest growth in
nearly a quarter of a century.

The narrowing of interest rate margins will eat into
lenders' profitability, with Cinda Securities' chief strategist,
Jiahe Chen, predicting it will cut profits by up to 5 percent.

Interest margins generated from lending have already been
shrinking for second-tier lenders, which have been squeezed by
competition from online financiers and a rise in funding costs
stemming from an industry tussle for deposits.

Fitch Ratings downgraded its credit rating of China Guangfa
Bank, a medium-sized lender, two days before the rate-cut
announcement, and said the level of off-balance-sheet lending
among second-tier banks was a concern.

The squeeze on profits will make it tougher for lenders to
raise capital to meet new international rules designed to
protect depositors from banking collapses. Retained profits are
one way in which banks can build up regulatory capital.

"In the past when Chinese banks disburse loans, they mainly
relied on profits from their own capital to replenish their
capital," Jiang Jianqing, chairman of China's biggest commercial
bank, the Industrial and Commercial Bank of China Co Ltd
, told a conference in Beijing on Saturday.

'WE WON'T START LENDING NOW'

The People's Bank of China said in announcing the rate cut
that it wanted to help smaller firms gain access to credit.

While the measures may ease the financing costs of these
firms' existing loans, it is unlikely to encourage banks to
write new loans to lower-rung borrowers, bankers said.

Smaller companies are considered high risk and banks do not
want to increase their exposure to weaker borrowers, they said.

"At the moment banks have a lot of problems with them, they
have higher rates of default ... we're suspicious of their
creditworthiness, so we're very careful about lending to them,"
said a senior loan officer at a top-10 bank.

He declined to be identified because he was not authorised
to speak to the media.

Among China's five largest banks, lending will continue to
favour China's state-controlled companies, state-invested
enterprises and those involved with large projects overseen by
the government, bankers added.

"We've been moving away from SME lending over the last two
years in my department. We won't start lending now," said
another senior loan officer at one of the country's top five
banks.
(Additional reporting by Koh Guiqing in Beijing, Lawrence White
and Lisa Jucca in Hong Kong; Editing by Kazunori Takada and Mark
Bendeich)